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We have recently seen plenty of notable IPOs coming out of the tech space, but as TechCrunch notes, we have yet to hit the peak.

Of past IPOs, Facebook (FB 182,68 -1,08 -0,59%) (which raised $16 billion on its opening day in 2012) and Alibaba (BABA 195,00 -1,02 -0,52%) (which still holds, at $21.8 billion, the largest IPO of all time) are undoubtedly jewels on the crown. Fewer API-related companies, on the other hand, have taken the IPO route. Twilio (TWLO 52,54 -1,39 -2,58%) is the most notable exception to that rule, raising $150 million in its 2016 IPO.

In this post we’ll be looking some more notable stocks and IPOs in the realm of the API economy to gauge the current status of API-first businesses at large. We’ll decipher a few reasons behind the skittishness typically exhibited by API companies when it comes to going public, with perhaps the biggest being that they have traditionally been smaller organizations, and why that might be set to change in years to come.

Disclaimer: This should not be considered investment advice. Rather, we feel that looking at the stock market is an interesting way to analyze the tech industry to better understand public reaction to apps and the hidden API industry that enables them.

More Tech IPOs are on the way…

As a Fortune article noted in 2016, “going public hasn’t been very en vogue among tech companies” lately. Whether it was political or economic turbulence affecting faith in the financial sector, we can’t say. It’s true that going public isn’t always the goal for every business. However, confidence in the market is returning; the Dow Jones set a record high on January 26th 2018.

Many tech companies have recently gone public or are rumored to do so. VentureBeat’s Chris O’Brien writes that “for tech [in 2017], there were 37 IPOs that raised $9.9 billion. Again, that’s a solid increase from the 21 IPOs in 2016 that raised a paltry $2.9 billion. But it’s still considerably below the 56 IPOs in 2014 that raised $32.9 billion.” Pinterest and Lyft are among those touted to go public in 2018, which many believe will trigger a wave of tech companies following suit.

…and those involving APIs are already here

Notably, several recent IPOs in the tech scene have had an API flavor. Communications Platform-as-a-Service Bandwidth (BAND 35,32 -0,26 -0,73%) filed for an IPO in 2017 and has been on a steady rise since. Shopify (SHOP 141,12 +0,29 +0,21%) is another high performer with an engaged API developer program that we’ve covered in the past.

Docusign (DOCU 44,78 -0,12 -0,27%) and Smartsheet (SMAR 19,89 +0,43 +2,21%) filed for IPOs recently; they both place heavy emphasis on integrating with other services and offer comprehensive APIs that are widely used. Look know further than the The Docusign API Pricing page to see that their developer program is a clear business driver. Dropbox (DBX 29,97 +0,23 +0,77%) recently IPO’d as well.

The clear demonstration of a healthy appetite for enterprise cloud companies in the market will undoubtedly be well received by API companies considering an IPO, and it makes sense that the confidence they have in IPOs will be on the rise as well.

Acquisition Vs IPO

In most cases, going public via an IPO is designed to help companies raise capital and expand. In the world of tech, however, it also often represents an exit strategy for venture capitalists who have invested in a company.

Although global VC (venture capital) activity hit a high in 2017, the total number of deals was down from 2016. Meanwhile, IPO volumes were up almost 50% from 2016. All of this suggests that investors are open to putting more of their eggs in fewer baskets, i.e. finding “IPO friendly” companies with relatively straightforward exit strategies in their future.

A significant issue with this is that, despite the advantages of an IPO (increased awareness, raising additional capital etc.), they remain fraught with uncertainty. A Bloomberg article reported that, at the end of the year, only 40% of 2016 tech IPOs were trading above the closing share price on their first day of trading. Even Twilio faced these headaches, hovering around this figure (~$28) for much of 2017, but has recovered to around the $40 mark for most of 2018.

In many respects, acquisitions are more of a “safe bet” because the cash is guaranteed. Plus, in the case of acqui-hires, founders and existing employees get to either carry on with their work or are absorbed into a larger company where they can continue to innovate. For example, since being acquired by Google (GOOGL 1.069,64 -11,62 -1,07%) for $625 million in 2016, Apigee (APIC 17,38 0,00 0,00%) founder continues to work on Apigee while CEO Chet Kapoor is now VP of Google.

None of this is to say acquisitions always work out as intended but it is worth pointing out that, for many founders, being acquired by the Googles and Facebooks of the world is the ideal end goal.

People still don’t ‘get’ APIs

APIs have historically been seen by many as tools built by techies for techies to make their jobs easier. This could explain why many API companies have taken a safer acquisition route than going public.

Granted, the above is an oversimplification. We should also point out that a lack of knowledge around a particular company or space doesn’t always deter trading. Think about Alibaba for example, which is a Chinese company whose e-commerce offering is one that most American investors will never even have used.

Despite debuting the day after Brexit, Twilio’s IPO vastly outperformed expectations with shares almost doubling in value on its first day of trading alone. While its initial IPO value, $150 million, might sound modest when compared with Facebook or Alibaba it should be noted that it was the largest of any US tech IPO in 2016. Couple that with the growing appetite for APIs, in both the B2B space and among the general public, and it’s likely that APIs will soon be better understood than they are now.

What Does This Mean For The API Economy?

It would be easy to look at companies like Spotify, which listed directly instead of serving up an IPO, or even giants like Hilton, which was bought out in 2007 and delisted from the NYSE, and think that IPOs are becoming passé or that they’re no longer a goal most CEOs have in mind.

But a TechCrunch article on Spotify’s lack of an IPO makes a really important point:

“Like several other tech “unicorns” valued at $1 billion or more, Spotify does not need most of the trappings of a traditional IPO. It has already been behaving like a publicly traded company, reporting its financials publicly in Europe. It has raised all the capital it needs from private market investors ($2.7 billion including debt and secondary transactions, according to Crunchbase). It has plenty of name recognition among investors.“

Most tech companies, especially API-first companies, don’t have anything close to household name recognition of brands like Spotify or Hilton. Unless these companies are eyeing an acquisition then the end goal likely remains an IPO.

Make no mistake, there are plenty of IPOs involving API companies right around the corner. The real question is whether or not any of them are capable of matching, or even raising, the bar set by Twilio, Spotify, and others enjoying the thrills of public trading.

Final Thoughts: From API to IPO

Inc. says that tech is in midst of an “IPO renaissance,” and it feels like they’re right. More interestingly, if we look at CNBC’s list of the top 11 tech companies most likely to go public, we notice a common trend: API. 6 provide a public or partner API program, and the 5 others either use RESTful APIs internally and/or integrate external APIs into their stacks. It is clear that being savvy with APIs is a market advantage, which just might play a major role in taking a company from API to IPO.

About Art Anthony

Art is a copywriter/blogger/content creator who gave up the big city grind to go freelance and live out in the countryside. He writes about everything from financial services and software/technology to health and fitness for big corporations and startups alike. He started his own company, Copywriting Is Art, several years ago and tweets at @ArtCopywriter.